The standard business investment story goes like this: capital expenditures rise when unemployment falls.
That's because employers need to buy machines and other technologies to get the job done when actual workers become scarce. The relationship may not work out so cleanly going forward, an Atlanta Federal Reserve business survey suggests. We delve into capital expenditure in developing nations, how low interest rates impact pension plans, and what the Fed really means when it use the term "asymmetric."
How tight labor markets could curb investments
Capex in the U.S. hasn't picked up much with economic growth and falling joblessness. Though tight labor markets have come alongside stronger capital investment historically, the results of an Atlanta Fed business survey may bode poorly for the outlook.
While companies cite a variety of reasons for not investing, a lack of qualified workers was a top concern, according to the report. And among growing, profitable and stable companies, "constraints on talent acquisition and retention is easily the largest issue when it comes to investment spending headwinds." More than half of the businesses with revenue in excess of $10 million reported labor constraints as a barrier.
As unemployment dips and workers prove increasingly hard to come by, this could grow even more problematic. One "intriguing'' thing to consider is that education and workforce development could help fuel investment growth, the authors write.
Investment: Not just a problem for advanced nations
Investment spending growth has been weak the world over, and that extends to emerging economies. World Bank researchers say the pullback in developing nations probably reflects numerous factors, including a slowdown in foreign direct investment, weaker commodity prices, and mounting private debt. Lackluster growth in advanced economies is also having a spillover effect. This is bad news for countries as they try to climb the development ladder, because it's dragging on potential output and could hamper technological progress, the authors write.
How do low interest rates impact pensions?
Pension plans in the U.K. that pay a guaranteed level of benefits based on the recipient's salary and length of service could experience funding shortfalls in an era of slow growth and low interest rates, according to a Bank of England blog post. There's some evidence this phenomenon is pushing fund managers to search for higher returns, because they've increased holdings of instruments other than traditional bonds and equities, according to the authors. While this doesn't pose a financial stability risk in and of itself, it could fuel risk indirectly: funds' intensified search for yield could bid up the prices for key asset classes such as infrastructure or commercial real estate, for instance. It could also hasten the demise of defined benefit plans in favor of defined contribution schemes, the authors write, reducing financial certainty for future retirees.
When Janet Yellen says "asymmetric"...
Fed officials like to say that risks to monetary policy are "asymmetric," meaning that it's tougher to boost growth by cutting rates than it is to slow the economy by raising them. New research from the Richmond Fed demonstrates just how true that has been, historically. Looking at data from 1959 to 2007, they show a 0.7 percentage point increase in the Fed's main interest rate results in a 0.15 percentage point rise in unemployment, while a rate cut of 0.7 percentage point produces only a 0.04 percentage point drop in joblessness. The researchers reached the conclusion that "contractionary monetary policy has a significantly stronger effect on unemployment than expansionary policy." The authors also find some evidence, though it isn't conclusive, that prices have an asymmetrical response to monetary policy.
About the Author
